“Own to Rent” Taking Place in Phoenix

“Own to Rent” Taking Place in Phoenix: In 2007, Dean Baker proposed an idea he called ‘own to rent‘, in which homeowners facing foreclosure would be given the option of staying in their home indefinitely, provided they paid market rent. The notion was that stressed families would be spared the cost and disruption of moving if they were indeed viable renters (a big deal for kids in school). It would also save the bank the cost of foreclosure and the expense of maintaining a home and readying it for sale.

Critics argued it was a terrible idea, that banks would come out worse, and that the former owners would make lousy tenant (it appears not to have occurred to them that the now-tenants probably have improvements they made, giving them more attachment to the house than a typical rental).

Well, this obviously stupid idea is taking place full bore in Phoenix, as entrepreneurs find owners facing foreclosure and offer to buy the home if they remain as tenants. That says the economics are at least tantamount to the banks offering the same deal directly. However, in fairness, investors look negatively at banks that carry a lot of REO (real estate owned) so a bank would have to do a great deal of investor education to operate a similar program (and imagine what it would take to get investors in a securitized vehicle to sign off on this approach). And the other reason an idea like this has attracted such a following in Phoenix is a unique combination of a particularly distressed real estate market and a big influx of investment funds. But if other markets continue to swoon,the Phoenix model may become common.

From the New York Times:

With this sweltering desert city enduring one of the largest tumbles in housing prices for any urban area since the Depression, there is an unrelenting stream of foreclosures to choose from. On some days, hundreds are offered for sale at the auctions that take place on the plaza in front of the county courthouse.

There is also a large supply of foreclosed families who can no longer qualify for a loan. And that is prompting a flood of investors like Mr.[Lou] Jarvis, who wants to turn as many of these people as possible into rent-paying tenants in the houses they used to own….

Absentee buyers, who can be either investors or individuals purchasing a vacation property, bought nearly 4 of every 10 homes sold in the Phoenix metropolitan area in April, according to the research firm MDA DataQuick. That is up 50 percent since late 2007, and is nearly the same ratio as at the 2005 peak.

Once again, just about everybody seems to be buying as many houses as they can, positive it will make them rich — or at least allow them to recoup some of their losses….

In January, Mr. Jarvis began working as director of investor relations for Brewer Caldwell, a property management firm that had been approached by the CBI Group, a real estate fund based in Calgary, Alberta. In its first foray into the American market, CBI is buying 175 rental houses in Phoenix.

One of them belonged to Mary Lou and Jorge Aguilar, who purchased it new for $111,000 in 1999. Three years ago, after a series of financial difficulties, they refinanced for $185,000 for reasons they no longer understand. ‘Our lender talked a pretty picture,’ Mrs. Aguilar said bitterly.

When the couple’s mortgage payment adjusted to $1,242 a month, they fell behind and ended up in foreclosure. They now pay $1,014 in rent, which they say is bearable.

Still, their feelings are mixed. ‘It’s not our house anymore; it’s someone else’s,’ said Mrs. Aguilar, who works for the state welfare department.

For CBI, the deal is sweet. At that rent, it would recoup the $52,000 it paid for the house in about five years. ‘This type of deal is absolutely not available in Canada,’ said Jarrett Zielinski, a CBI executive. ‘No city here has fallen by 50 percent, the way Phoenix has.’

However, there is a possible fly in the ointment:

Brewer Caldwell has bought about 125 houses this year for its clients. Only a quarter had owners who were living there already and willing to stay on as tenants. Filling up the rest, and all the other houses the company intends to buy, will depend on a steady supply of people who cannot afford to buy for themselves.

‘If Phoenix loses population,’ Mr. Jarvis says, ‘then buying houses here is a bad bet.’

Phoenix is geographically dispersed and requires heavy duty air conditioning for a chunk of the year. Will the city lose appeal when energy prices rise?

(Via naked capitalism.)